By William Chislett
The Spanish economy roared along like a high-speed train for a decade until it slowed down dramatically in 2008. Only recently has it emerged from a five-year recession. But the jobless rate has tripled to 26% (four times the US level) and will not return to its pre-crisis level for up to a decade. Why is this?
(1) The economic model was excessively based on the shaky foundations of bricks and mortar.
Between 2000 and 2009, Spain accounted for around 30% of all new homes built in the European Union (EU), although its economy only generated around 10% of the EU’s total GDP. In one year alone (2006), the number of housing starts (762,214) was more than Germany, France, and Italy combined. After Spain joined the euro in 1999, interest rates were low, property was seen as a good investment in a country with very high home ownership (85%), and there was a high foreign demand for holiday and retirement homes due to the 60 million tourists who visited Spain annually.
When the property bubble burst, jobs were destroyed as quickly as they had been created. As construction is a labor intensive sector, its collapse reverberated through other areas of the economy. Between 2002 and 2007, the total number of jobholders, many of them on temporary contracts, rose by a massive 4.1 million, a much steeper rise than in any other EU country and more than three times higher than the number created in the preceding 16 years. Since 2008, more than 3 million jobs have been lost, around half of them in the construction and related sectors.
(2) Labor market laws were too rigid.
Spain has a dysfunctional labor market: even at the peak of the economic boom in 2007, the unemployment rate was 8%, a high rate by US standards. At the hiring end, Spain’s labor market laws were very flexible, largely as a result of widespread use and abuse of temporary contracts, but at the firing end, severance payments were higher than in comparable countries. This made employers reluctant to put workers on permanent contracts. The reforms approved in 2012 by the conservative government of the Popular Party, which returned to power at the end of 2011, lowered dismissal costs and gave companies the upper hand, depending on their financial health, in collective wage bargaining agreements between management and unions. The reforms have yet to have a discernible impact on job creation. They have, however, lowered the GDP growth threshold for net job creation from around 2% to 1.3%. The Spanish economy is expected to grow by more than 1% this year.
(3) The property sector caused a banking crisis and corruption to flourish.
The 45 regionally-based and unlisted savings banks, which accounted for around half Spain’s financial system, were closely connected to politicians and businessmen. Many of them made reckless loans to developers and were massively exposed to the property sector when it crashed. The reclassification of land for building purposes and the granting of building permits, in the hands of local authorities, created a breeding ground for corruption. Bad loans soared from 0.7% of total credit in 2007 to more than 13%. The European Stability Mechanism came to the rescue of some banks in 2012 with a €41 billion bail-out package in return for sweeping reforms. The number of savings banks has been reduced to seven, with high job losses. Spain exited the bail out in January.
Spain was ranked 40th out of 177 countries in the latest corruption perceptions ranking by the Berlin-based Transparency International, down seven places from the year before. Its score of 59 was six points lower than its previous score in 2012, in a numerical index where the cleanest countries are those closest to a score of 100. Spain lost more points than almost every other country, topped only by war-torn Syria.
(4) The education system is in crisis.
The education system is holding back the need to create a more sustainable economic model. One in every four people in Spain between the ages of 18 and 24 are early school leavers, double the EU average but down from a peak of one-third during the economic boom, when students dropped out of school at 16 and flocked in droves to work in the construction and related sectors. Almost one-quarter of 15-29 year-olds are not in education, training, or employment. Results in the OECD’s Pisa international tests in reading, mathematics, and scientific knowledge for 15-year-old students and for fourth-grade children in the TIMS and PIRLS tests are also poor. No Spanish university is among the world’s top 200 in the main academic rankings. Research, development and innovation spending, at 1.3% of GDP, is way below that of other developed economies. In these conditions, the creation of a more knowledge-based economy is something of a pipe dream, and the brightest young scientists and engineers are emigrating.
(5) Spain received more immigrants in a decade than any other European country.
Immigrants were lured to Spain when the economy began to expand rapidly. Their number soared from more than 900,000 in 1995 to 5.7 million in 2012, the largest increase in a European country in the shortest time. They were particularly needed in the construction and agricultural sectors, as there were not enough Spaniards prepared to work in them. At the peak of the boom in 2007, more than half of the 3.3 million non-EU immigrants in Spain worked in the construction sector. When the economy went into recession, immigrants bore a large part of the surge in the unemployment, as many of them were on temporary contracts and were the first to lose their jobs. The jobless rate among immigrants (37%) is much higher than that for Spaniards (24%). Immigrants only began to return to their countries in significant numbers in 2012 and Spain’s population declined by 400,000 in 2013, an unprecedented fall in the country’s modern history.
William Chislett is the author of Spain: What Everyone Needs to Know. He is a journalist who has lived in Madrid since 1986. He covered Spain’s transition to democracy (1975-78) for The Times of London and was later the Mexico correspondent for the Financial Times (1978-84). He writes about Spain for the Elcano Royal Institute, which has published three books of his on the country, and he has a weekly column in the online newspaper, El Imparcial.